Consumer advocates warn against predatory payday loans


"Ridiculous" is how Riverside resident Krystle Waters describes the loan she got after getting divorced and falling behind on her bills. She got the loan from a Check 'n Go loan center in Riverside.

Krystle took out a loan using her Ford Fusion as collateral.

After borrowing $6,000, she ended up, she thinks, paying $16,000 to pay off the loan.

That's $16,000 in payments for a $6,000 loan. The interest rate was very high, at 102 percent.

The loan was paid off earlier than it was due. Otherwise it would have cost Krystle more than $19,000.

And if she defaulted on the loan, she would have lost her vehicle.

Exorbitant interest rates and losing a car is a dangerous combination, according to consumer advocates.

"What that ends up doing is making it more likely that a borrower is going to lose their car because they can't afford to make those payments," said Ginna Green, communications manager, Center for Responsible Lending.

The non-profit group says it's working to eliminate what it calls abusive financial practices by lenders.

"They claim that they're providing a service, but really what they end up providing is debt service," said Green.

Unlike banks, Check 'n Go and other storefront lenders specialize in riskier, high-interest loans like "payday loans" and car-equity loans.

Surprisingly, there's no limit as to the amount these lenders can charge for the type of loan Krystle got.

What Check 'n Go did was perfectly legal, but is it right?

Consumer advocates say no. They say these loans prey on borrowers who can barely afford to pay their own bills. In fact, many of them take out new loans just to pay off the old one -- a vicious cycle one California lawmaker says has to be stopped.

"They are targeting some of the most vulnerable people that we currently have right now, and it's completely outrageous what they're doing," said state Senator Ted Lieu (D-Redondo Beach).

Lieu says these high-interest loans target low-income consumers who are hit hard in these tough economic times. Lieu says he'll introduce legislation in January to regulate these lenders.

Lieu describes these loans as "outrageous," and says they're often bundled and sold to Wall Street investors.

"This is exactly what caused our financial collapse last decade," said Lieu. "It's happening again. This time, instead of sub-prime mortgage loans, you're dealing with sub-prime car loans."

In many neighborhoods you can find block after block of storefront lenders offering payday loans. There are more than 2,000 across the state.

And the number of payday loans taken out by Californians has increased every year since 2006.

Payday lenders allow borrowers to take out small loans, up to $300, and they're supposed to be paid back in a very short time. If they're not, the interest and late fees can pile up based on an annual return as high as a whopping 459 percent based on an annual return.

So if you need money in a hurry, there are other ways to borrow at a fraction of the cost.

For example: Water and Power Community Credit Union offers a payday-type loan up to $500. The interest rate on its "Power Advance" loans is set at 18 percent and it doesn't have to be paid back quickly.

"We give the consumer 60 days to pay their loan back, where we notice that the competition's normally the next payday," said Carl Stewart, president and CEO, Water and Power Credit Union. "So you get the money longer. We feel that that does make it easier on the consumer's budget."

Krystle Water's grandfather, Bud Childs, who helped Krystle pay off her 102-percent-interest car-equity loan, says borrowers like his granddaughter often don't realize these loan rates can be so high.

"Last time I heard about it was when the Mafia was loan-sharking," he said.

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